Over the last 12 months, as the world has emerged from Covid-19, various fiscal and monetary stimuli injected in 2020 – to the tune of approximately US$ 13 trillion – have resulted in a strong demand recovery across the world.
However, recurring Covid-19 waves and the lockdowns that accompanied them disrupted supply chains globally in 2020-21. Then came the Russia-Ukraine war in spring 2022 followed by China’s zero-Covid lockdown. In the face of strong demand and supply-shocks galore, CPI inflation has crossed 7% in almost all major economies. This in turn has led various central banks, led by the Fed, to begin what looks like a prolonged cycle of interest rate tightening.
loose monetary policies globally in the past two years had led to negative interest rates, making fundraising effortless for growth companies and driving up valuations. Now, with interest rates rising, “money is no longer free”, which can have massive implications for valuations and fundraising
We foresaw some of this when we first published our Black Swan memo at the start of the Covid in early 2020. What we got wrong was the monetary and fiscal policy response that followed and the distortion field that created,” Sequoia wrote in a confidential advisory note to the founders of companies where it invested in. “Sustained inflation, and geopolitical conflicts further limit the ability for a quick-fix policy solution. As such, we do not believe that this is going to be another steep correction followed by an equally swift V-shaped recovery, like we saw at the outset of the pandemic,” added the note, which ET has seen.
the valuation swings currently seen were a reflection of uncertainty about demand, changing labour market conditions, supply chain uncertainties and war. These are factors that ultimately affect business, it said.
“We expect the market downturn to impact consumer behaviour, labour markets, supply chains and more. It will be a longer recovery and while we can’t predict how long, we can advise you on ways to prepare and get through to the other side
With macro uncertainty around inflation, interest rates and war, investors are relooking for companies that can produce near-term certainty. Capital is getting more expensive … leading to investors de-prioritising and paying up less for growth … The focus on near-term momentum is often shifting toward companies who can demonstrate current profitability,” Sequoia added.
It added that belt-tightening would have a domino effect with “second-and-third-order” effects, as “one company’s cost represents someone else’s revenue or purchasing power”.
Sequoia also said the US was experiencing the third largest Nasdaq draw down in the last 20 years, with an increasingly volatile tech market in the last six months. Further, 61% of all software, Internet and fintech companies are trading below pre-pandemic 2020 prices, it said.
“The era of being rewarded for hypergrowth at any costs is quickly coming to an end,” the venture firm added.
Who survives?
According to Sequoia’s note, the survival of companies depends on “who moves the quickest” and “will have the most runway to avoid the death spiral”.
“Do the cut exercise (projects, R&D, marketing, other expenses); it doesn’t mean you have to pull the trigger, but that you are ready to do it in the next 30 days if needed. In 2008, all companies that cut were efficient and better. Don’t view cut as a negative, but as a way to conserve cash and run faster,” said Sequoia in the letter, advising founders to take a conservative view of the situation
Overall the U.S. consumer still remains in great shape. They came into these price hikes, this inflation, with cushion on their balance sheet. Certainly employment is high, so the overall U.S. consumer remains in a very strong place," Brent Schutte, chief investment officer at Northwestern Mutual Wealth Management, told Yahoo Finance Live.
"The big fear was that inflation was going to continue to run away and cause the Fed to have to tighten the U.S. economy into a recession," he added. "I think we’re all starting to gradually wake up to the reality that goods spending ... was pulled forward. Inventories have been rebuilt, and goods spending has caused the inflation that you’re seeing. That’s going to roll over as people move over to service sector spending."
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